Client Update – The SECURE Act

At the end of December, Congress passed a new law – the SECURE Act – that dramatically changes the post-death income tax treatment of retirement accounts, including IRAs and 401(k) plans.  The new law affects many clients, and may require you to make changes to your estate plan.

Changes to distributions after death

The SECURE Act eliminated the “Stretch IRA” – the opportunity for most retirement account beneficiaries to receive distributions slowly over the remainder of their lifetime.  Now, most beneficiaries who inherit a retirement account in 2020 or later must withdraw all the assets within ten (10) years of the account owner’s death.  In most cases, the 10-year required withdrawal period will increase income taxes.

Some beneficiaries are still eligible for a lifetime payout period.  These “Eligible Designated Beneficiaries” are exceptions to the 10-year required withdrawal rule and include:

  • The surviving spouse of the retirement account owner;
  • A disabled or chronically ill beneficiary;
  • A minor child of the retirement account owner (but not a minor grandchild); and
  • A beneficiary who is less than 10 years younger than the retirement account owner.  

Other changes during account owner’s lifetime

The SECURE Act also amended the laws governing retirement accounts in other important ways.  It increased the age at which the account owner must begin required minimum distributions from 70 ½ to 72 for those who did not reach 70 ½ by the end of 2019.  It also eliminated the age limit for deductible IRA contributions. 

Under the new law, if you are over 70 ½, you may still make qualified charitable distributions up to $100,000 per year from your IRA.  However, that amount is reduced by deductible IRA contributions you made in the same year. 

Do these changes impact you?

The SECURE Act has broad impact.  Many clients will need to make changes to their beneficiary designations or their estate plans.   If you have a retirement account, you may need to make changes to your estate plan if:

  • Your retirement accounts are large (valued at several million dollars and more).  The impact of the increased income tax will be significant.
  • You named as beneficiary a minor or young adult, or a trust for his or her benefit. 
  • You named as beneficiary a disabled or chronically ill person, or a trust for his or her benefit.
  • You want your retirement account to provide long term support to a beneficiary who is disabled, ill, or unable to manage money.

Please reach out to us so we can provide specific, expert advice to benefit your family.

How can we help you?

The SECURE Act also offers some new estate planning opportunities to consider.

  • You may wish to do a Roth conversion of all or part of an existing IRA to save your beneficiaries income taxes.  Although income taxes will be due at conversion and the 10-year rule will still apply, the beneficiaries will not pay income taxes on the accelerated distributions.
  • If you are charitably inclined, you may wish to leave all or part of your retirement account to charity or to a charitable remainder trust, which do not pay income taxes, and leave other assets to individual beneficiaries.
  • You may want to reconsider the division of assets among your beneficiaries.  For instance, you may want to leave your retirement account to a disabled child (who is an Eligible Designated Beneficiary and qualifies for a lifetime payout period) and leave other assets to other beneficiaries.
  • You may consider purchasing additional life insurance to replenish retirement assets lost to income taxes.

What about your trust?

Most clients will not have to revise their trust to accommodate the new law, even if retirement benefits will pass to the trust at death.  The trust provisions will still work.  Nonetheless, an amendment to the trust may be required if a trust beneficiary is disabled or chronically ill. 

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